Despite lower volumes, container shipping lines’ earnings benefited from higher revenue per load and lower fuel costs in Q2 2020, writes shipping transportation analyst John D McCown
Despite lower volumes due to the coronavirus pandemic, container shipping lines collectively posted a significant jump in earnings, registering an estimated US$1.7Bn improvement in profit year-on-year in Q2 2020.
The collective bottom line for container shipping in Q2 2020 had a projected US$1.8Bn profit, up from a net profit of US$53M in Q2 2019. The second-quarter profit was a higher increase sequentially from the small loss in Q2 2020.
To put the US$1.8Bn second-quarter profit into perspective, it represents a 4.2% margin on estimated revenue of US$43Bn and just a 6.7% annualised return on equity (ROE) on an estimated US$107Bn of shareholder equity in the container shipping industry.
Coronavirus crisis disrupts volumes
Global container volume in the second quarter was lower across trade lanes, declining 9.8% versus a 3.4% decline in Q1 2020. The global decline was driven by the initial effect of the coronavirus crisis that first disrupted supply and then demand. Imported container volume into the US declined 11.6% in the second quarter compared to the 8.4% decline in the first quarter.
Pricing increases mitigated the volume declines. A global pricing index based on overall actual movements indicates that total revenue per load including surcharges was 9.1% higher in the second quarter compared to a year ago and 0.9% higher sequentially versus the first quarter. Various spot rate indices showed larger gains, but the majority of loads moved at rates established in annual contracts.
Fuel costs lower
Despite the increase in revenue per load, fuel costs - one of the largest cost items - had a notable decline in the second quarter. Based on a cost index that is relevant to carriers, fuel costs during the second quarter were down 59% compared to the second quarter last year and down 52% sequentially from the first quarter. The gap between the fuel surcharges included in revenue and the actual fuel cost experienced in the second quarter explains almost all of the net income reported by the industry in the second quarter. How much of this is just timing (changes in fuel surcharges lag changes in fuel costs) or a semi-permanent re-adjustment (effectively a further rate increase) remains to be seen. That dynamic will have a significant impact on industry results for the balance of the year.
Container shipping line performance, Q2 2020
|Container line||Q2 2020||Q2 2019||Q2 Diff||6 mo 2020||6 mo 2019||6 mo Diff||2016-6 mo 2020|
|US$ M||US$ M||US$ M||US$ M||US$ M||US$ M||US$ M|
|% Of Total||64.5%||64.5%||64.5%||64.5%||64.5%||64.5%||61.5%|
Container shipping line results
The accompanying table recaps the overall bottom line results reported by container operators for Q2 2020 versus Q2 2019 and the related variances. Also shown is the six-month year-to-date results. The table takes the reported results from 11 operators representing 64.5% of TEU capacity and assumes the remaining non-reporting operators had similar per-TEU results to develop overall sector results. The table also includes cumulative net income from 2016 through six months of 2020. Companies are listed based on that cumulative result, going from worst to best overall net income performance. All amounts are in millions of dollars.
The second-quarter result brings the estimated total sector loss since the beginning of 2016 to US$6.9Bn. Those cumulative results include a US$733M profit for 2019, a US$2.1Bn loss for 2018, a US$1.7Bn profit for 2017 and a US$8.9Bn loss for 2016.
Results in the second quarter had all 11 reporting companies showing better results versus the year-earlier period. The underperformers in the group were Yang Ming and Hyundai Merchant Marine, while at the other end of the spectrum were European carriers Maersk and Hapag-Lloyd, both of which have been consistent overperformers.
There were multiple catalysts at work during the second quarter, both negative and positive. The most immediate impact of the global health crisis was a contraction in volume, initially due to supply disruption and then due to broader demand disruption.
Historically, volume contractions have resulted in almost immediate rate contractions as carriers compete to maintain vessel utilisation. This did not happen this time, perhaps because carriers recognised that they were facing unprecedented volume declines and a repeat of past behaviour would be ruinous. Steps were taken to blank sailings that kept capacity tight in key markets.
In some lanes, it turned out to be overcorrecting which resulted in spot rates spiking. New supply chains that were formed needed to be stocked with inventory and this contributed to volume being ahead of expectations.
Against this backdrop of tight capacity and rising rates, the industry was benefiting from the collapse in energy prices that accompanied the health crisis as crude oil prices in March were just one-third of what they were three months earlier. That environment allowed them to avoid passing along those cost savings in the form of lower fuel surcharges during the second quarter.
Indeed, an overriding story of 2020 is the changing impact of fuel costs on the bottom line. It initially looked like 2020 would have a major financial challenge with the industry facing the transition to higher fuel costs due to the new IMO fuel regulations. With the drop in crude oil prices and a sharp narrowing of the spread between dirty and clean fuel at the beginning of the year, that challenge was initially largely abated. When energy prices collapsed in March, by generally maintaining fuel surcharge levels carriers were able to turn fuel costs into a decisive positive. That is quite a transition compared to how that issue looked this time last year.
At the beginning of the health crisis, it seemed that the industry was looking at a 2020 loss that could potentially eclipse the US$8.9Bn lost in 2016. That is no longer the case. But with six months to go, the industry still faces challenges in terms of both volume and rates, including the relationship between fuel surcharges and actual fuel costs. Buckle up and stay tuned.
Mr McCown is the co-founder and former chairman and chief executive of US-flag container carrier Trailer Bridge, Inc. His mentor was Malcom McLean, the transportation pioneer who invented container shipping. More recently, Mr. McCown’s focus on the industry has been from an investment perspective, including several years as the transport sector head at a US$20Bn hedge fund. Founder of Blue Alpha Capital, he is set to release a book on the development of the modern cargo shipping industry.